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Golden Points To Ponder

By: Richard Mills | Friday, December 14, 2012

As a general rule, the most successful man in life is the man who has the
best information

Investors seeking leverage to precious metals should focus on junior resource
companies who own the world's undeveloped gold and silver deposits as they
provide the best exposure to a rising precious metals price environment.

You need to find the quality management teams with money in the treasury,
the ability to raise more and owning the advanced projects that are well along
the development path towards a mine.

A mine that is going to be a long life, lowest quartile all-in cost producer
in a geo-politically
safe country.

These companies are the world's future gold/silver producers and of course
many will be in the sights of mid-tier and major producers for takeover candidates
as reserve replacement targets.

The gold mining industry needs to discover 90 million ounces of gold every
year just to stay even.

But despite increased exploration expenditures, a record US$8b in 2011, and
an increasing gold price, gold ounce discovery is not keeping up to the rate
needed to replace mined ounces.

The Metals Economic Group estimates that the 99 significant discoveries (defined
as greater than 2 mil oz) found between 1997 and 2011 replaced only 56 percent
of the gold mined during that same period.

According to the Thomson Reuters GFMS's Gold Survey 2012 global gold mine
production was flat (output rose 0.1 percent to 1,366 metric tons) in the first
half of 2012.

The average grade of ore processed globally dropped 23 percent from 2005 through
the end of last year and is forecast to decline another four percent in 2012.

The GFMS report also said the average cash cost across the gold mining industry
for mining an ounce of gold is a record $727 per ounce. The average cash margin
dropped to $872 an ounce in the second quarter from as much as $1,032 an ounce
in last year's third quarter

Average operating/cash cost figures include only those costs directly associated
with the production of the gold such as;

Using the all-in figure provides a more accurate and definitive picture of
actual mining cost and profit.

Also, according to CIBC World Markets, the sustainable number gold miners
need is $1,700/oz. The long term gold price chart from the World Gold Council
shows gold has been in consolidation since late 2011.

Capital inputs account for about half the total costs in mining production
- the average for the economy as a whole is 21 per cent. Obviously many of
the costs, once incurred, cannot be recovered by sale or transfer of the fixed
assets.

Mining is an extremely capital intensive business for two reasons. Firstly
mining has a large, up front layout of construction capital called Capex -
the costs associated with the development and construction of open-pit and
underground mines. There are often other company built infrastructure assets
like roads, railways, bridges, power generating stations and seaports to facilitate
extraction and shipping of ore and concentrate.

A growing proportion of mining projects are in remote areas of developing
economies where there's little to no existing infrastructure

Secondly there is a continuously rising Opex, or operational expenditures.
These are the day to day costs of operation; rubber tires, wages, fuel, camp
costs for employees etc.

The bottom line? It is becoming increasingly expensive to bring new mines
on line and run them.

"In the next few years, escalating costs, talent shortages and competing
infrastructure builds will make it very difficult for mining companies to
complete their capital projects on time and on budget. These types of cost
and time overruns can create significant risks for miners, including the
danger of scaring off potential investors." Deloitte, David Quinlin,
European Mining Lead, Switzerland

Since 2006 the major gold producers have spent 40 percent of their entire
market capitalization building new mines. As you can see in the chart below
it isn't going to get any cheaper - major miners will need to spend 60 percent
of their market capitalization building
new mines in order to sustain the same level of production going forward.

The major gold producers desperately need to replace their mined gold reserves
yet can't afford to build many of the large deposits slated to be built.

The reasons behind flat-lining gold production, and record cash and all-in
costs, are numerous:

Junior market caps have been savaged - 25 percent of the stocks on the TSX.V
are under a nickel, another 25 percent are under a dime - 50 percent of the
stocks trading on the TSX.v are under a dime, a total of 70 percent are under
.20 and 80 percent are under .30 cents. Less than 20 percent of stocks on the
Venture are over .30 cents and only seven percent of stocks are over a dollar.

Producers are not able to replace their reserves because there's a lack of
discovery, few large high grade deposits are being discovered and most of those
that have been discovered aren't owned by producers ...

"Today, the major producers and their majority-owned subsidiaries hold
39 percent of the reserves and resources in the 99 significant discoveries
made in the past 15 years." Metals Economics Group (MEG)

The junior exploration sector is presently in the midst of one of the worst
financing environments ever experienced by the sector.

One market analyst recently said that out of the 1800 companies he tracks,
as many as 524 have less than $200,000 in working capital.

With today's extremely low share prices, financing - if money is even available
- is going to massively dilute shareholders forcing a tremendous number of
future rollbacks.

Financing for many juniors is going to be challenging - very ironic that just
a few short years ago, with gold at only $400 oz, it was much, much easier
to raise money then today with gold at $1700.00 oz! Those juniors with some
money, and not wanting to excessively dilute shareholders raising more with
devastated share prices, will conserve their cash and drastically cut expenditures.

The outlook for many juniors in 2013 is grim, many will not survive. Expect
rollbacks, property sales for cash, shares for debt and mergers and acquisitions
(M&A) to become the norm. Exploration will drop, the discovery of the future
supply of gold, silver and other metals will be put on hold.

A Junior exploration company's place in the food chain is to acquire and explore
properties. Their job is to make the discoveries that the mid-tiers and majors
takeover and turn into mines. Junior exploration companies own the majority
of the world's future gold mines.

The juniors who do have money for exploration and development of their properties,
and those few who can get financed, will be well rewarded in the market place
for discoveries and bringing the lowest cost projects to production.

This author believes that there is exceptional, and as of yet, undiscovered
value in junior companies with quality assets in safe stable countries.

The bottom line for investors in the resource sector is that many juniors
working in safe stable jurisdictions, already own what the world's mining companies
increasingly, desperately need.

Ahead of the Herd has posted a short list of junior resource precious metal
companies with defined deposits operating in North America. The AOTH list is
free, you may access it here.

Richard lives with his family on a 160 acre ranch in northern British Columbia.
He invests in the resource and biotechnology/pharmaceutical sectors and is
the owner of Aheadoftheherd.com. His articles have been published on over 400
websites, including: SafeHaven.com, WallStreetJournal, USAToday, NationalPost,
Lewrockwell, MontrealGazette, VancouverSun, CBSnews, HuffingtonPost, Beforeitsnews,
Londonthenews, Wealthwire, CalgaryHerald, Forbes, Dallasnews, SGTreport, Vantagewire,
Indiatimes, Ninemsn, Ibtimes, Businessweek, HongKongHerald, Moneytalks, SeekingAlpha,
BusinessInsider, Investing.com and the Association of Mining Analysts.

If you are interested in advertising on Richard's site please contact him
for more information, rick@aheadoftheherd.com

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